egu a ory na ysis orm

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1 to be inconsistent with the statutory provision that allows a management company to operate all or part any relevant state or federal court decisions? If yes, cite the specific law, case or regulation as well as, (9) Is the regulation mandated by any federal or state law or court order, or federal regulation? Are there (8) State the statutory authority for the regulation. Include specific statutory citation. of the licensed business. Therefore, the regulations are being changed to be consistent with the statutory business. Nonetheless, the Board s regulations require that all indicia of ownership remain with the The Liquor Code authorizes management companies to operate and manage all or part of a licensed licensee. The regulatory requirement that all indicia of ownership remain with the licensee has proven scheme (i)). The Board has the authority to make regulations pursuant to section 207(i) of the Liquor Code (47 P.S. R (7) Briefly explain the regulation in clear and nontecrmical language. (100 words or less) [1 Final Omitted Regulation [1 Certification by the Attorney General LI Final Regulation LI Certification by the Governor FAX: (717) ra-lblegal(pa.gov Secondary Contact: Justin E. Blake (717) Identification Number: 86 Primary Contact: Rodrigo J. Diaz (717) Pennsylvania Liquor Control Board Harrisburg, Pennsylvania (Same Contact Information) Proposed Regulation LI Emergency Certification Regulation; (3) PA Code Cite: 40 Pa. Code 3.141, (2) Agency Number: 54.3 (1) Agency: Pennsylvania Liquor Control Board (4) Short Title: Management Contracts (5) Agency Contacts (List Telephone Number and Address): 401 Northwest Office Building (6) Type of Rulemaking (check applicable box): LRRC Number: i123 (All Comments submitted on this regulation will appear on IRRC s website) (Completed by Promulgating Agency) egu a ory na ysis orm u INDEPENDENTREGULA TORY

2 2 There are no relevant state or federal court decisions pertaining to this regulatory change. possible and approximate the number of people who will benefit. regulation. Describe who will benefit from the regulation. Quantify the benefits as completely as between a licensee and a management company to operate, manage, or supervise at I or part business organizations with fees and profits being exchanged among the constituent parts of the licensee company as an entity that operates, manages or supervises all or part of a licensed business on behalf of pecuniary interest in the licensed business, despite the fact that management companies are held to the comments from the regulated community, the Board therefore believes a regulatory change is needed to recognize the reality of the modern business environment in which licensees enter into negotiated management agreements that, while not structured as a formal partnership or joint venture, may involve existing regulations. pecuniary interest being held by a management company in subsection 3.141(d) (40 Pa. Code management company, it removes the requirement that a management contract reserve to the licensee provision was not meant to prevent a management company from having control and receiving a share particularly given the fact that such management companies are required to meet the same eligibility of the profits of the licensed business when the management company is on the license application, i consistent with the definition of a management company, as set forth in the Liquor Code, than the a licensee. However, the regulations currently preclude a management company from having a of the operati on of the i censed premi ses. These agreements, which can involve multi-layered In recent years, the Board has encountered a growing number of management contracts, i.e. agreements or, in the case of section 436, the issuance or transfer of a distributors, importing distributors or retail (10) State why the regulation is needed. Explain the compelling public interest that justifies the any deadlines for action. No, this regulation is not mandated by any federal or state law or court order, or federal regulation. and the Liquor Code (47 P.S , 4-477(g)). In fact, the Liquor Code defines a management same standards as any person involved in the license. (40 Pa. Code 3.143(b)(2)). In response to the sharing of profits and control. The Board further believes that the amended regulations will be more The proposed regulatory change amends the Board s regulations to eliminate the blanket prohibition of a 3.141(d)) as well as a similar reference in subsection 3.143(b)(1). In view of the statutory definition of a the capability to direct its own business by deleting subsection 3.141(b). Sections 404 and 436 of the Liquor Code (47 P.S , 4-436) provide that only the applicant for, dispensers license, may have a pecuniary interest in the license. However, the Board believes this in the case of section 404, the issuance, transfer or extension of a hotel, restaurant or club liquor license, criteria as the applicant under subsection 470(a.1) of the Liquor Code (47 P.S (a.1)), i.e. reputation, criminal history, and current or prior involvement in other licenses, and particularly since a business on behalf of a licensee. This change will therefore prevent placing an undue burden on the management company is defined in the Liquor Code as an entity that manages or operates a licensed formation and reporting of management contracts by the regulated community, while remaining consistent with the Liquor Code by having the management company listed on the application, investigated by the Board s Bureau of Licensing, and subject to refusal by the Board if the management company would not qualify for the license in its own name. and management company, are expressly permitted by the Board s.regulations (40 Pa. Code (a))

3 The Board has received approximately one hundred fifty-five (155) applications for use of a management company since January 1, Therefore, the Board estimates that approximately fifty (50) to sixty (60) licensees each year will be impacted by the regulatory change, in addition to any other licensees that decide to make changes to an existing management contract after the change take.s effect. (11) Are there any provisions that are more stringent than federal standards? If yes, identifr the specific provisions and the compelling Pennsylvania interest that demands stronger regulations. The proposed regulation is not more stringent than any federal standards since federal regulations do not address this matter. (12) How does this regulation compare with those of the other states? How will this affect Pennsylvania s ability to compete with other states? A comparison of the proposed regulation with the laws of other states would not be appropriate since alcoholic beverage licensing is controlled by neighboring states in accordance with their unique and individual regulatory systems. Nonetheless, if anything the proposed changes will have a positive effect on Pennsylvania s ability to compete with other states in that it will lessen the regulatory burden on national hotel and resort chains that choose to locate in the Commonwealth, since such entities typically operate under management contracts. (13) Will the regulation affect any other regulations of the promulgating agency or other state agencies? If yes, explain and provide specific citations. The regulation will not affect any other existing or proposed regulations of the Board, nor is the Board aware of any regulations of another state agency that would be affected. (14) Describe the communications with and solicitation of input from the public, any advisory council/group, small businesses and groups representing small businesses in the development and drafting of the regulation. List the specific persons and/or groups who were involved. ( Small business is defined in Section 3 of the Regulatory Review Act, Act 76 of 2012.) The Board did not formally solicit input from the public in the development of the regulatory change, although during the course of reviewing management contracts Licensing has received general comments from attorneys who represent licensees. Recently, attorneys from the law firm of Flaherty & O Hara suggested that allowing hotel operators the ability to have an interest in the licensed business would make Pennsylvania more attractive to such companies without any resulting public harm. The firm further identified the specific regulatory provisions which are inconsistent with the statutory definition of a management company. As a result of this and other suggestions, the Board believes the proposed amendments are in the public interest. (15) Identify the types and number of persons, businesses, small businesses (as defined in Section 3 of the Regulatory Review Act, Act 76 of 2012) and organizations which will be affected by the regulation. How are they affected? As of August 14, 2015, there are sixteen thousand three hundred seventy (16,370) active retail licenses 3

4 4 (16) List the persons, groups or entities, including small businesses, which will be required to comply The proposed regulation simply expands the options available to licensees and management companies (including clubs) that could be potentially affected by the proposed regulation. Out of this group, approximately one thousand one hundred ninety-one (1,191) hold hotel licenses. Under federal law (relating to small business size standards) small businesses in the Full Service Restaurant and they have annual receipts of thirty-two and a half million dollars ($32,500,000) or less. Thus, the There are no persons, groups, or entities that will be required to comply with the proposed regulation. The proposed regulatory changes will benefit all current and future licensees financially by expanding the options for entering into management contracts. Regarding any social impacts, the Board believes the existing regulatory requirements for the eligibility of a management company will ensure that only The proposed regulation will benefit the regulated community by reducing the burden of compliance The Board does not anticipate any adverse effects because management companies are required by The proposed regulatory changes will allow the regulated community more freedom in negotiating and (17) Identify the financial, economic and social impact of the regulation on individuals, small (18) Explain how the benefits of the regulation outweigh any cost and adverse effects. in entering into a management agreement. All management agreements must be reported to Licensing. Drinking Places (Alcoholic Beverages) industries are those with annual receipts of seven and a half million dollars ($7,500,000) or less. (13 C.F.R ). Hotels are considered small businesses if majority of businesses licensed by the Board would likely be considered small businesses. The proposed regulation would make it easier for these licensees to use management companies. how the dollar estimates were derived. line with the reality of the modern business environment and the definition of management company in (19) Provide a specific estimate of the costs and/or savings to the regulated community associated with a proposed licensee. Thus, the Board is satisfied that the regulatory change will not negatively affect the on the license application, and on other forms supplied by Licensing, to have a greater interest in the with the regulation. Approximate the number that will be required to comply. businesses, businesses and labor communities and other public and private organizations. Evaluate the benefits expected as a result of the regulation. qualified entities will be approved to operate a licensed business. the Liquor Code. with respect to the formation of management contracts. By allowing a management company identified licensed business, licensees and management companies may negotiate and structure their agreements in regulation to meet the same criteria for eligibility as any person involved in a licensed business. Licensing reviews all license applications and investigates a proposed management company as it would public welfare. compliance, including any legal, accounting or consulting procedures which may be required. Explain structuring management contracts for the operation of the licensed business. Therefore, industry members will likely realize cost savings associated with legal, accounting, and consulting procedures,

5 although the magnitude of such savings is unknown to the Board. There are no anticipated costs to the regulated community associated with compliance. (20) Provide a specific estimate of the costs andior savings to the local governments associated with compliance, including any legal, accounting or consulting procedures which may be required. Explain how the dollar estimates were derived. The regulation is not expected to result in any costs or savings for local governments; it is not anticipated that any legal, accounting, or consulting services would be required. (21) Provide a specific estimate of the costs andlor savings to the state government associated with the implementation of the regulation, including any legal, accounting, or consulting procedures which may be required. Explain how the dollar estimates were derived. The regulation is not expected to result in any costs or savings for the state government; it is not anticipated that any legal, accounting, or consulting services would be required. (22) For each of the groups and entities identified in items (19)-(21) above, submit a statement of legal, accounting or consulting procedures and additional reporting, recordkeeping or other paperwork, including copies of forms or reports, which will be required for implementation of the regulation and an explanation of measures which have been taken to minimize these requirements. Because the regulated community, local governments, and the state government are not required to take any new action as a result of this regulatory change, it is not expected to affect legal, accounting or consulting procedures and should not require any additional reporting, recordkeeping or other paperwork. (23) In the table below, provide an estimate of the fiscal savings and costs associated with implementation and compliance for the regulated community, local government, and state government for the current year and five subsequent years. SAVINGS: Current FY Year FY +1 FY +2 FY +3 FY +4 FY +5 Year Year Year Year Year Regulated Community so so so so so so Local Government so so so so so so State Government so so so so so so Total Savings so so so so so so COSTS: Regulated Community so so so so so so Local Government so so so so so so State Government so so so so so so 5

6 Total Costs so } so so so so so REVENUE LOSSES: I Regulated Community so so so so so so Local Government so so so so so so State Government so so so so so so Total Revenue Losses so so so so so so (23a) Provide the past three year expenditure history for programs affected by tne regulation. Program FY -3 FY -2 FY -1 Current FY N/A N/A N/A N/A N/A (24) For any regulation that may have an adverse impact on small businesses (as defined in Section 3 of the Regulatory Review Act, Act 76 of 2012), provide an economic impact statement that includes the following: (a) An identification and estimate of the number of small businesses subj ect to the regulation. As of August 14, 2015, there are sixteen thousand three hundred seventy (16,370) active retail licenses (including clubs) that could be potentially affected by the proposed regulation. Out of this group, approximately one thousand one hundred ninety-one (1,191) hold hotel licenses. Under federal law (relating to small business size standards) small businesses in the Full Service Restaurant and Drinking Places (Alcoholic Beverages) industries are those with annual receipts of seven and a half million dollars ($7,500,000) or less. (13 C.F.R ). Hotels are considered small businesses if they have annual receipts of thirty-two and a half million dollars ($32,500,000) or less. Thus, the majority of businesses licensed by the Board would likely be considered small businesses. (b) The projected reporting, recordkeeping and other administrative costs required for compliance with the proposed regulation, including the type of professional skills necessary for preparation of the report or record. There will be no new administrative costs above what is already required under the current regulations. (c) A statement of probable effect on impacted small businesses. Small businesses will have more options in how they structure their business relationships, in the event they contract with a management company. (d) A description of any less intrusive or less costly alternative methods of achieving the purpose of the proposed regulation. The prohibition on management companies having a pecuniary interest in a license is set forth by regulation. Therefore, removing the prohibition must be accomplished by regulation. (25) List any special provisions which have been developed to meet the particular needs of affected 6

7 groups or persons including, but not limited to, minorities, the elderly, small businesses, and farmers. No special provisions have been developed to meet the particular needs of affected groups or persons including, but not limited to, minorities, the elderly, small businesses, and farmers. (26) Include a description of any alternative regulatory provisions which have been considered and rejected and a statement that the least burdensome acceptable alternative has been selected. Non-regulatory alternatives were not considered because the benefit for the regulated community requires the amendment of the current regulations. (27) In conducting a regulatory flexibility analysis, explain whether regulatory methods were considered that will minimize any adverse impact on small businesses (as defined in Section 3 of the Regulatory Review Act, Act 76 of 2012), including: a) The establishment of less stringent compliance or reporting requirements for small businesses; b) The establishment of less stringent schedules or deadlines for compliance or reporting requirements for small businesses; c) The consolidation or simplification of compliance or reporting requirements for small businesses; d) The establishment of performing standards for small businesses to replace design or operational standards required in the regulation; and e) The exemption of small businesses from all or any part of the requirements contained in the regulation. Non-regulatory alternatives were not considered because the benefit for the regulated community requires the amendment of the current regulations. (28) If data is the basis for this regulation, please provide a description of the data, explain in detail how the data was obtained, and how it meets the acceptability standard for empirical, replicable and testable data that is supported by documentation, statistics, reports, studies or research. Please submit data or supporting materials with the regulatory package. If the material exceeds 50 pages, please provide it in a searchable electronic format or provide a list of citations and internet links that, where possible, can be accessed in a searchable format in lieu of the actual material. If other data was considered but not used, please explain why that data was determined not to be acceptable. No data was used for the basis of the proposed regulation. (29) Include a schedule for review of the regulation including: A. The date by which the agency must receive public comments: November 2015 B. The date or dates on which public meetings or hearings will be held: December 2015 C. The expected date of promulgation of the proposed regulation as a final-form regulation: January

8 D. The expected effective date of the final-form regulation: February 2016 E. The date by which compliance with the final-form regulation will be required: February 2016 F. The date by which required permits, licenses or other approvals must be obtained: N/A (30) Describe the plan developed for evaluating the continuing effectiveness of the regulations after its implementation. Review of the regulations is ongoing and any changes will be through the rulemaking process. 8

9 CDL-1 RECEVEE)!RC FACE SHEET 75 r FOR FILING DOCUMENTS WITH THE LEGISLATIVE REFERENCE BUREAU (Pursuant to Commonwealth Documents Law) DO NOT WRITE IN THIS SPACE Copy below is hereby approved Copy below is hereby certified to be a true Copy below is hereby approved as to form as to form and legality, and correct copy of a document issued, and legality. Executive or Independent prescribed or promulgated by: Agencies: BY: Attorney Ge (DEPUTY A*rORNEY GENERAL) Pennsylvania Liciuor Control Board (AGENCY) DOCUMENT/FISCAL NOTE NO BY: Chief Counsel OCT DATE OF ADOPTION: September September BY: / I DATE OFAPPROVAL DATE OFAPPROVAL U Check if applicable U Check if applicable. No Attorney Copy not approved. Objections TITLE: Chairman General approval or objection within attached. (Executive Officer, Chairman or Secretary) 30 days after submission. TITLE 40 LIQUOR PART I. LIQUOR CONTROL BOARD CHAPTER 3. LICENSE APPLICATIONS SUBCHAPTER M. MANAGEMENT CONTRACTS The following sections are proposed to be amended: Management contracts Board approval and licensee responsibility.

10 PROPOSED RULEMAKING LIQUOR CONTROL BOARD 40 PA. CODE CHAPTER 3 Subchapter M. Management Contracts The Liquor Control Board ( Board ), under the authority of section 207(i) of the Liquor Code (47 P.S (i)), proposes to amend Chapter 3. Summary In recent years, the Board has encountered a growing number of management contracts, i.e. agreements between a licensee and a management company to operate, manage, or supervise all or part of the operation of the licensed premises. These agreements, which can involve multi-layered business organizations with fees and profits being exchanged among the constituent parts of the licensee and management company, are expressly permitted by the Board s regulations (40 Pa. Code 3.141(a)) and the Liquor Code (47 P.S , 4-477(g)). In fact, the Liquor Code defines a management company as an entity that operates, manages or supervises all or part of a licensed business on behalf of a licensee. However, the regulations currently preclude a management company from having a pecuniary interest in the licensed business, despite the fact that management companies are held to the same standards as any person involved in the license. (40 Pa. Code 3.143(b)(2)). In response to comments from the regulated community, the Board therefore believes a regulatory change is needed to recognize the reality of the modem business environment in which licensees enter into negotiated management agreements that, while not structured as a formal partnership or joint venture, may involve the sharing of profits and control. The Board further believes that the amended regulations will be more consistent with the statutory definition of a management company, as set forth in the Liquor Code, than the existing regulations. The proposed regulatory change amends the Board s regulations to eliminate the blanket prohibition of a pecuniary interest being held by a management company in subsection 3.141(d) (40 Pa. Code 3.141(d)) as well as a similar reference in subsection 3.143(b)(1). In view of the statutory definition of a management company, it removes the requirement that a management contract reserve to the licensee the capability to direct its own business by deleting subsection 3.141(b). Sections 404 and 436 of the Liquor Code (47 P.S , 4-436) provide that only the applicant for, in the case of section 404, the issuance, transfer or extension of a hotel, restaurant or club liquor license, or, in the case of section 436, the issuance or transfer of a distributors, importing distributors or retail dispensers license, may have a pecuniary interest in the license. However, the Board believes this provision was not meant to prevent a management company from having control and receiving a share of the profits of the licensed business when the management company is on the license application, particularly given the fact that such management companies are required to meet the same eligibility criteria as the applicant under

11 subsection 470(a.1) of the Liquor Code (47 P.S (a.1)), i.e. reputation, criminal history, and current or prior involvement in other licenses, and particularly since a management company is defined in the Liquor Code as an entity that manages or operates a licensed business on behalf of a licensee. This change will therefore prevent placing an undue burden on the formation and reporting of management contracts by the regulated community, while remaining consistent with the Liquor Code by having the management company listed on the application, investigated by the Board s Bureau of Licensing, and subject to refusal by the Board if the management company would not qualify for the license in its own name. Affected Parties The affected parties include all present and future licensees that contract with a management company to operate the licensed business. Paperwork Requirements The proposed regulation would not require any additional paperwork to be filed. License applicants are already required to identify management companies on the license application, and current licensees are required to notify the Board in the event they enter into a management contract. (40 Pa. Code 3.142). Fiscal Impact There is no anticipated adverse fiscal impact from the proposed regulation. The amendment is meant to ease the burdens of compliance for the regulated community. Therefore, by making its regulations more accommodating to businesses, the Board anticipates the change will have a positive fiscal impact on licensees as well as the Commonwealth. Effective Date These regulatory changes will become effective upon publication in final form in the Pennsylvania Bulletin. Public Comments Interested persons are invited to submit written comments about the proposed rulemaking to Rodrigo Diaz, Executive Deputy Chief Counsel, or Justin Blake, Assistant Counsel, Office of Chief Counsel, Pennsylvania Liquor Control Board, Room 401, Northwest Office Building, Harrisburg, PA , within thirty (30) days after publication of the proposed regulation in the Pennsylvania Bulletin. Comments submitted by facsimile will not be accepted. Please note that all public comments will be posted on the Independent Regulatory Review Commission s website. No personal information will be redacted from the public comments received. Regulatory Review

12 Under section 5(a) of the Regulatory Review Act (71 P.S (a)), on 2015, the Board submitted a copy of these proposed amendments to the Independent Regulatory Review Commission (IRRC) and to the Chairpersons of the House Liquor Control Committee and Senate Committee on Law and Justice. A copy of this material is available to the public upon request. Under Section 5(g) of the Regulatory Review Act, IRRC may convey any comments, recommendations or objections to the proposed regulations within thirty (30) days of the close of the public comment period. The comments, recommendations or objections shall specify the regulatory review criteria that have not been met. The Regulatory Review Act specifies detailed procedures for review, prior to final publication of the regulation, by the agency, the General Assembly and the Governor of comments, recommendations or objections raised. Tim Holden Chairman

13 TITLE 40. LIQUOR CHAPTER 3. LICENSE APPLICATIONS PART I. LIQUOR CONTROL BOARD violations of the Liquor Code or this title. (c) The licensee s use of a management company will not affect the licensee s responsibility for as reputation, criminal history, and current or prior involvement in other licenses. include reasons specified in section 4-470(a.l) of the Liquor Code (47 P. S (a.l)) such (2) Facts upon which the Board could refuse a person s involvement in the license which may [Reserved.] (1) [The creation by the management contract of a pecuniary interest in the license.] company. The Board s refusal may be based upon the following: (b) The Board may refuse the involvement of a person providing services as a management either approve or refuse the involvement of a person providing services as a management company. (a) The Board will notify the current licensee or applicant, in writing, of the Board s decision to *** IReserved.] (d) [A management contract may not give a pecuniary interest to a management company.] premises where it shall be available for inspection by the Board. (c) A management contract must be in writing, and a copy shall be maintained on the licensed business.] [Reserved.] (b) [A management contract must reserve to the licensee the capability to direct its own (a) A licensee may contract with another person to manage its licensed premises Management contracts Board approval and licensee responsibility. Subchapter M. MANAGEMENT CONTRACTS ANNEX A

14 Commonwealth of Pennsylvania Pennsylvania Liquor Control Board October 29, 2015 SUBJECT: Proposed Regulation Package Management Contracts TO: FROM: DAVID SUMNER, EXECUTIVE DIRECTOR INI)EPENDENT REGULATORY REVIEW COMMISSION RODRIGO J. DIAZ EXECUTIVE DEPUTY CHIEF COUNSEL PENNSYLVANIA LIQUOR CONTROL BOARD By Hand Delivery The Pennsylvania Liquor Control Board ( PLCB ) is submitting proposed amendments to chapter 3 of its regulations. Enclosed please find a copy of the regulatory analysis form, signed CDL-1 face sheet, preamble and Annex A (regulatory text). These amendments are being delivered today to the legislative oversight committees and to the Legislative Reference Bureau. They have been approved by the Office of Attorney General as to form and legality only. If you have any questions and comments about this regulatory submission, feel free to contact this office at (717) If I am not available, you can discuss this matter with Justin Blake, Assistant Counsel. cc with enclosures: Honorable Charles Mcllhinney, Majority Chairman, Senate Law and Justice Committee Honorable James Brewster, Minority Chairman, Senate Law and Justice Committee Honorable Chris Ross, Majority Chairman, House Liquor Control Committee Honorable Paul Costa, Minority Chairman, House Liquor Control Committee Gail Reinard, Executive Director, Senate Law and Justice Committee Victor Wills, Executive Director, Senate Law and Justice Committee Shauna Boscaccy, Executive Director, House Liquor Control Committee Lynn Benka-Davies, Executive Director, House Liquor Control Committee

15 TRANSMITTAL SHEET FOR REGULATIONS SUBJECT TO THE REGULATORY REVIEW ACT I.D. NUMBER: SUBJECT Management Contracts 2 AGENCY: Liquor Control Board T1 TYPE OF REGULATION X Proposed Regulation Final Regulation Final Regulation with Notice of Proposed Rulemaking Omitted 120-day Emergency Certification of the Attorney General 120-day Emergency Certification of the Governor FILING OF REGULATION DATE SIGNATURE DESIGNATION Ii Cii (ili g I SENATE LAW & JUSTICE COMMITTEE / /z/i 7 41f jf4i) (Majority) fo/9/ /4 SENATE LAW & JUSTICE C0MMITEE 1ISFQUOR CONTROL COMMIYFEE J) HOUSE LIQUOR CONTROL COMMITTEE /41 /J/424 Jmti44) (Minority) - i LEGISLATWE REFENCE BUU (6) INDEPENDENT REGULATORY REWEW COMMISSION